Industrial Demand for Silver not Enough to Drive Higher Prices

One of the bullish arguments I frequently hear about silver is that its use in industrial and medical applications was growing exponentially and that such rapid consumption of silver would lead to a squeeze on available supplies. The technologies touted included increased use in electronics, batteries, solar panels, RFID tags, medical applications and of course the much hyped cruise missiles. While these new uses of silver has led to tremendous growth in industrial demand for silver, is it enough to drive the price of silver much higher? The short answer is no.
Consider the chart below from the Silver Institute’s 2011 World Silver Survey. Notice the strong increase in industrial demand since 2001. Over that period, the use of silver in industrial applications increased from 350 million ounces to 487 million ounces, a 39% increase. However, over the same period demand for silverware and photography has dropped considerably more. Silverware demand fell from 106 million ounces to 50 million while photography dropped from 213 million to 73 million today. Thus although the use of silver for industrial purposes has and will continue to grow strongly, it has not been enough to offset the loss from other applications.
The silverware component has been particularly interesting to me recently. Over the past three months I’ve been doing consulting work for a precious metals refiner and was surprised by not only the quantity of silverware being returned to the smelter but of the quality. I have seen many high quality silverware sets, including some that were still in their original packaging that likely sold for $10,000 or more retail being scrapped like it was nothing. If one can only get melt for a beautiful sterling silverware set, it makes sense that manufacturers will not be making much more of it in the future (if you’re in the market for sterling silverware, let me know!).
In fact, as shown in the chart above and further detailed below, if not for investment buyers silver supply would greatly exceed demand. That is not necessarily a bad thing. Gold’s industrial and jewelry demand as a percentage of supply is even smaller and that hasn’t negatively impacted the metal. Likewise, it doesn’t mean that I am bearish on silver. Quite the opposite, at current levels it appears to be very attractive. But it is investment demand (and a declining dollar) that will drive it higher, not its industrial uses.

10 comments:

Kid Dynamite said...

ah hah! and now you know why the metals mafia must relentlessly pursue a campaign of bullish hype - to try to maintain exactly this investment demand. Without it, there's no shortage of silver - there's a surplus!

That's exactly the point I was trying to make here in a prior comment thread.

disclosure: LONG SLV at the moment.

Brian O'Flanagan said...

To add to that, in 2001 investment and coin was 8% of total demand for silver. In 2010, it was 26.4%.

It is still well below gold, though. For gold, investment demand is 38% and if you include jewelry (which really is an investment in most cultures) it is 88%.

So if you believe "silver is the next gold", then that 26.4% has room grow. But if silver doesn't become such a monetary metal, it will be difficult for demand to keep up with supply.

Kid Dynamite said...

to further add to that: the bull case in silver is not that there's a shortage of silver available that's needed for industry, but rather that you hope that OTHER people will want to own silver.. because... well, because THEY hope that even more OTHER people will want to own silver...

Warren James said...

Funnily enough, we have a big box of stunning silverware that just found, some of them are still wrapped in plastic with the original price tag on them (from a time when price tags were used). The retail price is now about spot price, which says volumes about fabrication and retail mark-up (we're not planning to sell).

I am of course, obliged to say of silver: 'at least you can eat (using) it!', and that a fork and spoon have utility value - can that be called 'inherent' value? (in addition to being antibacterial, which is why it was used for silverware in the first place).

The inflation of supply of both silver and gold is an important element in the investment story, thanks for bringing attention to it.(I'm also interested to see what the HFT bots have to say on the issue - since they seem to be the market makers these days).

Brian, is your premise that investment demand is solely responsible for the price movement of the previous years? I did my early silver research using supply and demand statistics like these, but was never able to draw anything conclusive. Long term I am interested in the 'peak silver' story - surely drawing down the 'scrap' stockpile has some kind of overall effect - especially if that is not being replenished?

Bullish on silver, long small-cap junior silver miners.

GM Jenkins said...

I agree that many who make the case for silver somewhat underhandedly confound the quantity of silver's uses with the quantity of silver actually needed for its many uses. But couldn't the industrial potential of silver be factoring into the investment demand? The same way the mere potential for massive inflation drives investment demand (despite actual inflation being far less that the 300% silver has risen in the past decade).

GM Jenkins said...

Then there's rhodium . . .

Brian O'Flanagan said...

@KD, yes that's true, but the same argument applies to many if not most other investments. One's investment in, say, AAPL stock depends on whether someone is willing to pay more for it in the future. Even factoring in growth, the market multiple could go from 15x to 5x.

@Warren, I think investment demand is the largest factor driving the gains. Surely weakening global currencies is playing a major role too.

@GM, indeed investment demand could be a function of expected future industrial demand, but that's a long shot in my view. Unless there is some major technology that is about to be developed that relies on silver, it's hard to see industrial demand growing enough of offset losses from other uses and taking up any slack from investment hoards.

The Big Setup said...

at some point SILVER will be in a bubble mania. It has NOT hit. I don't see the massive rise literally overnight, or the run on silver stocks, or the cabbie excitedly driving people to a massive lineup at the coin store, like the 80's. Until then...keep stacking.

Stock Market News today said...

we expect heightened price volatility for silver in 2012 and Silver demand in China and India is set to rise 40 persent in 2012

MICHAEL said...

One often overlooked factor on the bullish side is that because the use of silver for photography has plummeted so does the amount of scrap from recycled silver. The film industry had a very high amount of silver in film being recycled. Also hardly anybody buys silverware so that source of recycling drops over time as well. As for use as a monetary metal, silver has been the money for the middle and poorer classes historically way more than gold. Even Judas demanded payment in silver.